Where else can Australia’s banks find cost savings?
- Posted on December 8, 2020
- Estimated reading time 3 minutes
This article was originally published in FST Media.
The banking response to COVID-19 was a triumph in many ways, with institutions innovating at pace and executing with incredible agility to help retail and small business customers in a time of need. But the pandemic did take a toll on bank results. Cash earnings, net interest margins and return on equity all fell – while cost to income increased by more than 3%.
The turnaround in consumer sentiment is encouraging news, as well as the positive outlook on loan deferrals. However, financial performance will continue to be a significant challenge for Australia’s banks in the years ahead. Increased customer engagement via digital channels and remote employee working arrangements have significantly increased loads on aging technology systems with many banks struggling with scale, resilience, and increasing costs.
Add to this the challenge of Net Interest Margins being squeezed, it is easy to see why there is a need for banks to dramatically streamline their operating models, industrialise newly found business agility, and drive out costs in a sustainable manner. It’s time to rethink.
At Avanade, we believe important options for banks to reduce their cost base and protect profit margins include:
- Digital – The pandemic proved that digitisation needs to be more than “skin deep”. Banks that had invested in end-to-end digitised processing were able to scale well during the crisis. Now, others are following suit, with the industry norm quickly becoming a “digital-by-default” setting.
In the future, we can expect most call centre inquiries to be deflected to virtual agents, with only a few going through to human agents. The challenge will be balancing this contact-light presence with having a human touch for complex situations and advice when needed.
We also see opportunities for middle- and back-office processes to use intelligent automation as an effective approach to stop payments fraud and take costs out of anti-money laundering (AML) and Know Your Customer (KYC) regulatory checks.
- Cloud – Despite the major progress we are making with digital transformation, many banks are still shackled by elements of legacy IT. In fact, the risks around systems that are complex and difficult to change are becoming unacceptable. In our recent study, bank executives saw legacy IT, not only as a major obstacle to agility, but a significant hindrance to both retaining staff and innovation. As a result, many banks are now seriously looking to drastically simplify IT and move to the cloud. In February, Commonwealth Bank of Australia announced a move to the public cloud to lower costs and improve scalability. It involves a simplification program that will reduce its 3,500 applications by 25 percent.
As cloud migrations progress, we expect as-a-service capabilities in areas like payments or credit to accelerate transformation programs, flatten investment curves and move banks significantly from fixed to variable cost structures.
- Artificial intelligence (AI) – When COVID-19 hit, banks made greater use of AI to deal with the unusually high volume of customer service requests. In May, National Australia Bank announced it would more than double the number of enrolments in its VoiceID biometric authentication system over the remainder of 2020 - reducing customer identification times from minutes to seconds.
Now, banks should consider how they can further exploit chatbots and other AI applications to help simplify processes and manage risk. When Avanade helped to automate a complex mortgage approval process for a Spanish bank, which had more than 4,000 actions per contract, our solution helped to reduce costs for the bank by 75 percent.
AI will also help banks to target loans to high-risk sectors for proactive management, model loss provisions based on pandemic scenario data, and set up early warning signals to manage non-performing loan exposure - therefore enabling better capital management.
- Property – With some staff happy to continue to work remotely and customers acclimatised to self-service, branch footprints can be reset. For those not needed at head office, the existing branch network can be reinvented to accommodate local office workers and act as a workplace community hub. We expect to see the emergence of “micro branches”, which are primarily self-service, with staff there for assistance if needed.
Given the likely pressures on profitability and capital over the next year, now is the time for banks to reassess fundamental cost levers to become more operationally resilient, increase agility in a sustained manner, and improve performance.